In Defense of Spotify

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When it comes to the top sources of joy in my life, after family, friends and this, comes music.

It provides the soundtrack to our lives. It serves up nostalgia with but a few notes. It makes for awesome movie montages.

It also makes lots and lots of money.

The music industry generated nearly $4.5 billion last year in the United States. With that sort of dough moving around, one would assume the pie is big enough for all stakeholders. That doesn’t appear to be the case.

Just as with any industry, a complicated web of people and companies separates consumers from producers. Record labels have the highest profile of this bunch. The resulting attention has not been kind to them and their business practices.

Perhaps to deflect some of the heat coming their way and explain slumping record sales, the labels’ mouthpiece, the Recording Industry Association of America (RIAA), began to campaign heavily against the moral and economic hazard of music piracy. Pirates, the logic went, were starving artists of their rightful compensation.

Before sharing evidence to the contrary, allow me to offer some full disclosure. I was a music pirate back in the day. Downloading offered a buffet of tracks to sample and try on. If a performer or act resonated with me, I bought a CD or concert ticket as a show of financial support.

That sort of mentality shows in recent research on music piracy by The American Assembly at Columbia University. Thousands of phone interviews with music consumers of all ages paint a somewhat different picture of what ails the industry.

The chart below shows the sources of digital music files owned by users of peer-to-peer (P2P) networks, those commonly used to download music illegally, and non-P2P users.

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The key takeaway here, other than the observation that P2P users have larger collections than non-P2P users, is that a portion of the difference comes from much higher legal purchases of digital music. The trend is even more vivid overseas in Germany. It all lines up with other studies showing the biggest music pirates tend to also be the biggest spenders on recorded music.

Streaming Music and Revenue Streams

So if pirates don’t exactly fit the profile of industry wreckers, what’s the source of so much angst? We used to peg it on a distribution model built on the traditional recording, marketing and physical distribution of music, one that made artists reliant on well-connected and well-funded labels.

Music’s digital revolution, however, was seen as a white knight in that sense. Headlined by mp3 marketplaces like the iTunes store and streaming services like Pandora, the Internet would become the great equalizer, allowing fledgling bands and solo acts to spread like wildfire and reap more direct benefits.

Sadly, it hasn’t been the case. Labels have maintained their foothold in the digital space, keeping a hefty share of lucrative licensing deals with streaming services like Pandora. Spotify, a streaming service that mimics the music library you might own and access through iTunes, entered the U.S. a few years back and has gone from being labeled an industry game-changer to yet another example of how it’s broken.

I’m listening to some fantastic music through Spotify as I type this. Most people critiquing or offering commentary on the service admit the same thing. We love its ease of use, its seamless integration into social networks and the ability to discover new music and build a massive library through an ad-supported free version or premium versions topping out at $10 a month.

But at the end of the day, the makers of the product, the musicians, remain thirsty as the revenue stream dries to a trickle by the time it reaches them. Thanks to high-profile criticism from artists like Radiohead front man Thom Yorke, Spotify now finds itself under a less-than-desirable spotlight. The payouts to new and emerging artists, Yorke and his kin argue, amount to pennies on the dollar of traditional album sales.

Spotify counters saying it will have paid $1 billion to rightsholders (i.e., a mix of labels and artists) by the end of 2013. That hardly has the ring of an exploitive streaming service.

The Track Forward 

One of the most sensible pieces of commentary on the Spotify situation is a recent Fast Company Labs article written by a hybrid journalist and musician.

While defending music makers’ right to lobby for their own interests, the article points out that Spotify’s benefit to artists is largely in the long-term. It’s unfair to compare the relatively measly per-play payouts to sales of mp3s and entire albums. The value in a service like Spotify is two-fold: awareness and a long-term pay model that rewards quality, timeless music that continues to be played well after album sales taper off.

What criticism has lacked so far is a constructive plan forward. If you accept that Spotify has skin in the game (soon to be 10 figures’ worth), then the issue quickly turns to how musicians can profit more from the existing revenue being divvied up. They can continue blowing off steam at companies like Spotify, or they can work with them to pressure record labels for a fairer shake and also promote other sources of revenue.

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Spotify, for its part, could do a better job of giving artists’ more tools to play with and communicating its efforts to support small acts. Bumping up the transparency of how its $1 billion breaks down would also go a long way in educating the public and making labels more accountable for distributing the fruits of labor more fairly.

In marketing terms, artists could view streaming services as a tool to capture the attention of consumers and convert them into brand loyalists who go to their concerts and kickstart their upcoming ventures.

Or, they could attempt the strategy of indie darlings Macklemore & Ryan Lewis. The rapper/producer duo’s success, while coming against the odds, represents the future. Their song “Jimmy Iovine” coincidentally started playing in my shuffled playlist as I wrote these last few paragraphs. The song walks listeners through the damned-if-you-do experience of being wooed by a major record label.

“I appreciate the offer, thought that this is what I wanted,” Macklemore admits. “Rather be a starving artist than succeed at getting ——.”

[Update] Since this piece’s publish date, Spotify has heeded the call on all counts above and launched a new website for artists explaining its payment methodology and new artist-centric features.

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